In 2008, China will bring unified enterprise tax policy into effect, originally 15% foreign enterprise tax rate and 33% domestic enterprise tax rate will be unified to 25%. In the past, China government offers preferential tax rate in order to attract foreign direct investment, but now, how the rising foreign enterprise rate affect China’s social welfare?
We base on Janeba (1996)、Chen and Wu(2005) build up a theoretical and empirical model and analysis the social welfare effects of China enterprise tax reform of switching a dual tax system to a unified system. In the theoretical part, we find that if the foreign marginal cost is less than domestic marginal cost, then abrogating preferential foreign tax rate would damage host country’s social welfare; in the empirical part, we find that foreign direct investment will be beneficial to China’s economic develop. If a rise in foreign enterprise tax rate would reduce foreign profit and hence an incentive for foreign direct investment, then this policy could damage China’s social welfare.